Fears Of A Double-Dip Recession And Managing Workforce Reductions

Wednesday, October 5, 2011 - 10:18
Tullett Prebon (Americas) Holdings Inc.
Maranda W. Rosenthal
Jonathan Stoler

James R. Hays

Maranda W. Rosenthal

Jonathan Stoler

As the risk of a double-dip recession looms and companies continue to adjust their workforces to adapt to the more challenging economic times, employers are being faced with making the tough decision regarding the possibility of layoffs. Workforce reductions are one of the most unpleasant events for employers to deal with and often involve both economic and emotional considerations. Layoffs can expose employers to unexpected pitfalls and disastrous legal consequences as the company tries to navigate the myriad complex laws involved. In recognition of the current economic climate and the enormous amount of work required to properly plan and execute a large-scale layoff, this article is intended to assist in identifying key issues and to suggest several best practices when implementing a reduction-in-force.

Although every company’s reasons may differ, such as a continued downturn in the respective industry or the unexpected loss of a key client or customer, nearly all workforce reductions require that the company consider all possible scenarios and consequences, develop a comprehensive strategy for identifying affected employees and engage in a thorough legal analysis.

The best way to ensure that the company is in full compliance with all applicable federal, state and local laws, and to ease the negative emotional impact, is to engage in thoughtful planning. More often than not, when an employee understands the need and justification for the reduction-in-force, that employee can be made to feel like he or she has been treated with respect rather than as a disposable commodity. The employee is then much less likely to assert a legal claim regarding his or her separation of employment.

Of course, workforce reductions are one of the most extreme cost-cutting measures. As a result, before proceeding with a layoff of any size, companies should always consider alternative means of achieving budgetary goals. Among the many alternative methods are the following measures:

  • adjusting compensation levels;
  • adjusting hours of work;
  • eliminating overtime or implementing mandatory caps;
  • implementing a hiring freeze, which allows for natural attrition; and/or
  • implementing or offering temporary furloughs.

If none of the above measures is a viable solution, and the company is left in the unenviable position of having to involuntarily reduce headcount, the next question is often, “Now what?” When faced with this decision, the critical issues to address include the following:

  • the extent and size of the reduction-in-force;
  • how to determine which employees will be affected;
  • the criteria the company will use for selecting affected employees;
  • what documentation is necessary for proceeding;
  • how to minimize legal exposure; and
  • the best method of communicating the workforce reduction and the underlying rationale.

The Numbers Game

First and foremost, a company must determine the number of employees who must be involuntarily terminated in order to meet its economic objectives. Often, a company will try to unrealistically limit the number of affected employees. This is usually a mistake and many times can lead to a company being forced to engage in multiple rounds of layoffs. Such repeated reductions will significantly damage employee morale and can lead to greater-than-anticipated rates of attrition and widespread apathy among the employees who remain. As a result, it is best practice to be realistic about the numbers needed to achieve the necessary budgetary decrease in the first round. Doing so will help to avoid future layoffs and further damage to employee morale.

Duck, Duck, Goose

One of the most critical issues in the initial stages is the selection criteria for determining those employees who will be affected by the workforce reduction. Prior to taking any steps to implement the reduction-in-force, a company should have a clear set of criteria for making such determination. Having clearly documented criteria is often a key piece of evidence when defending against employee claims regarding discriminatory terminations, including the frequent claim that the company manipulated the layoff selection during the process to ensure that particular employees were included.

Another best practice is to set as many objective criteria as possible. Such objective measures can include seniority, educational requirements or overall costs to the company. Subjective criteria often lead to disagreements and leave the company exposed to second-guessing by judges and juries. The decision will often, however, necessarily include a subjective component. The prime example is where the company can only afford to keep the best performers and/or the employees with the greatest level of expertise. In this scenario, the decision will unavoidably be influenced by subjective elements. With this in mind, the company’s primary goal must be to implement and abide by set criteria and procedures designed to maximize the objective aspect of the selection decision. Above all, a company should minimize the appearance of arbitrary selection and ensure the criteria are not adversely impacting any protected category of employee.

The Paper Chase

Once the selection procedures are in place, it is critical that the company properly document the reason(s) for including a particular employee in the workforce reduction. Documentation is key. No company wants to be in the undesirable position of defending a lawsuit and having no documentation to rely on to support its justifications for specific terminations. Keep in mind, the statute of limitations for a discrimination claim often far exceeds the memories of those involved in the decision-making process.

The greatest protection against claims of discriminatory inclusion is a thorough and detailed memorandum made contemporaneously with the decision for selection which includes:

  • the reason(s) for inclusion, with references to the pre-set criteria;
  • explanations for the specific criteria relied upon within the affected area(s); and
  • a comprehensive chart listing all employees working in the affected areas with references as to why the employee was or was not included in the layoff.

When preparing this memorandum, the company should keep in mind that this document is primarily intended to be viewed by the average juror. Accordingly, a best practice is to avoid legalese and include a fair and objective description of the reduction-in-force. Ideally, the average person with no employment law or human resources experience should be able to read and fully understand the memorandum. This will be one of the company’s greatest defenses in any potential lawsuits.

Avoiding Pitfalls

One of the most often overlooked litigation pitfalls is a company’s failure to conduct a proper impact analysis of the workforce reduction. Companies will often know how to avoid the claim that a particular individual was intentionally selected for inclusion based upon an impermissible factor such as race or national origin. What companies frequently fail to do is to ensure that the reduction-in-force is not inadvertently affecting a disproportionate number of employees in legally protected categories.

The best way to avoid these types of claims and reduce the risk of future liability is to conduct a proper “adverse impact study” that consists of a statistical analysis that can show whether the composition of employees designated for layoff might create a numerical “appearance” of discrimination. The adverse impact study should determine how many of the affected employees fall into legally protected categories, such as employees over the age of 40, female employees, minorities and those employees who suffer from a disability. The study should be conducted to ensure that there is not a disproportionate number of employees in these protected categories being included in the workforce reduction. For example, statistics state that the percentage of employees included in the workforce reduction who are minorities should be relatively consistent with the number of overall minorities employed. Or, if the average age of the employees included in the reduction-in-force is statistically higher than the remaining employees, the results could indicate an appearance of age discrimination. In cases where disparities may or do exist, employers should consult with employment counsel or a human resources professional trained in this type of statistical evaluation.

Another common pitfall is a company’s failure to assess potential for retaliatory inclusion in the reduction-in-force. Prior to implementing any layoffs, employers should review the personnel files for each affected employee to assess the potential for retaliation. Sadly, it is all too often the case that a lower-level supervisor manipulates the selection criteria to ensure a particular employee is included based upon retaliatory motives. Accordingly, a company should carefully review all recommendations to ensure that such recommendations are not based on unknown discriminatory motives or personal conflict.

Breaking The News

How to Announce the Reduction Companywide

As a best practice, it is wise to make at least one general announcement on the same day that the affected employees are scheduled to be told. There are differing opinions, however, as to whether to make the general announcement before or after the individual employees have been informed. There are benefits and downsides to both approaches, and a company should consider them both before deciding which approach is most suitable for a specific situation.

Regardless of when the general announcement is made, it is best to hold a general meeting with all of the remaining employees once the workforce reduction has been communicated to the affected employees. This is a good time to answer any questions, to reassure the remaining employees and to discuss the company’s plans for the future. It also may be a good idea to use this meeting to communicate information regarding the company’s future considered too confidential or inappropriate to include in the general announcement given that such information would have been communicated to employees who were about to leave the company. Although there is no law or regulation that requires a company to document these general announcements, it is advisable to do so.

When to Communicate the Decision to Affected Employees

There is wide-ranging debate concerning the timing of communicating the reduction-in-force to the affected employees. Many companies choose to provide advance notice to the employees and then continue to employ the affected employees through the notice period. Often, when an employer chooses this route, the employer also offers some sort of retention bonus to encourage the employee to remain during the notice period. Other companies choose to pay the affected employees their aggregate compensation and benefits in lieu of any such notice. This is generally advisable in the situation where the company fears that the affected employee may be disruptive following notification. Whatever option the company chooses, it is best to consult with employment counsel to ensure that any release obtained will ultimately be enforceable.

How to Communicate the Decision to Affected Employees

Given the emotional and economic impact on the affected employees, it is a best practice to have the information communicated to them from someone with whom they are familiar, in a face-to-face meeting. All practical considerations aside, many believe that an in-person meeting is the most humane way to inform an employee that he or she has been included in the workforce reduction. With that being said, it is also a best practice to ensure that there are always at least two individuals present in addition to the affected employee and that the conversation is well documented to avoid any future he-said-she-said claims.

This meeting will often be the focus of any future litigation, and so it is best to be considerate and professional. The meeting should be centered around (1) the company’s need for conducting the layoffs; (2) why the particular employee was selected for inclusion; (3) any severance pay and, for employees over the age of 40 who are offered severance or benefits in exchange for a release, the information required by the Older Workers Benefits Protection Act; and (4) the standard termination issues covered during a normal termination, such as the employee’s final paycheck, return of company property, final expense reimbursements, COBRA, general employee benefit elections, etc. It is advisable that a human resources manager or employee familiar with the procedure handle this portion of the meeting.

The individual conducting the meeting must at all times remain professional and consistent. Managers are often tempted to ease the blow by implying that the company is acting unfairly or by suggesting (inaccurately) that the employee may be rehired at a future date. Accordingly, managers must be properly trained not to give in to this temptation and to know what to expect and how to best respond to questions and other reactions from the employee. It is important to treat the employee with dignity and respect during this meeting as doing so will be a key deterrent to future litigation.

Show Me The Money

More often than not, companies choose to provide affected employees with some form of severance or termination benefits, such as a salary continuation for a set number of weeks, lump sum payments based on seniority, acceleration of stock options and/or temporary payment of health insurance premiums. This is generally done to soften the economic impact of the termination and can also serve as a key negotiating point in seeking a general release of claims. The size of the reduction-in-force, the company’s financials and any existing written policy regarding severance will affect the amount and method of severance benefits. Other factors include severance eligibility, federal and state laws governing severance and consideration for general releases and potential contractual obligations. As a best practice, it is important to be aware of these factors when making severance determinations.

A company should also consider whether to offer a range of other post-termination benefits such as outplacement assistance, transfer opportunities and group termination programs. While such issues are outside the scope of this article, they are no less important and should be carefully considered with employment counsel.


Reductions-in-force invariably present employers with a wide range of complicated legal and employee-relations challenges that above all require significant forethought and analysis. The number one best practice for all workforce reductions is proper planning and consideration of relevant factors. Indeed, sufficient planning and effective partnering with experienced employment counsel will produce important benefits, placing companies in better positions to anticipate and favorably resolve potential litigations that call into question the appropriateness of otherwise lawful employment actions.

James R. Hays is a Partner in the Labor & Employment Practice Group in the firm's New York office and cochairs the firm's Traditional Labor Law Team. Maranda W. Rosenthal is Vice President and Associate General Counsel of Tullett Prebon (Americas) Holdings Inc. Jonathan Stoler is a Partner in the firm's Labor and Employment practice group in the firm's New York office and cochairs the firm’s global Labor and Employment practice and the National Non-Competition and Trade Secrets team.

Please email the authors at jhays@sheppardmullin.com or jstoler@sheppardmullin.com with questions about this article.

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